US embassy cable - 05TAIPEI1413

UNCLAS SECTION 01 OF 02 TAIPEI 001413 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, TW 
SUBJECT:  Taiwan State-owned Bank for Sale 
 
 
SUMMARY 
------- 
 
1.  (U) In mid-March 2005, two foreign consortia bid on the 
Changhwa Commercial Bank (CCB), slated to become the first 
Taiwan state-owned bank sold to foreign investors.  If the 
bid price is too low, Taiwan may reconsider the proposed 
sale.  The sale of CCB to foreign investors is a key part of 
Taiwan's second-stage financial reform goals.  In the first- 
stage, Taiwan cut the non-performing bank loan ratio (NPL) 
by half from early 2002 to the end of 2004.  End Summary. 
 
Global Depository Receipts (GDR) 
-------------------------------- 
 
2.  (SBU) On March 18, two groups of foreign investors 
submitted bids for CCB GDRs to Credit Swiss First Boston, 
the underwriter for the sale.  One consortium is headed by 
the Shinsei Bank of Japan; the other is composed of ING, 
Carlyle, and Lone Star.  The CCB will award 1.4 billion GDR 
shares, equivalent to 22% equity, to the foreign consortium 
with the higher bid.  The GDR bid winner will then be 
permitted to purchase another 18% ownership stake in CCB 
directly from the government.  This will enable the winning 
bidder to have effective control with a 40% equity stake. 
(Taiwan officials have repeatedly stated their intention to 
allow the foreign purchaser real control over management 
decisions.)  Media reports claim the bids were 50-75% of the 
CCB current share price.  Using these figures, the total 
sale would be US$2-4 billion.  CCB will review the bids and 
then send them to the Ministry of Finance for a final 
decision in June 2005. 
 
Promoting Taiwan 
---------------- 
 
3.  (SBU) Finance Minister Lin Chuan led a team of 
government officials to promote the sale of Taiwan banks to 
investment banks in New York in early March 2005.  Andrea 
Lee, Deputy Director of the Financial Supervisory 
Commission's (FSC) International Affairs Department, told 
AIT/T that the trip was very successful.  He said that the 
team's discussions with executives of Citibank, JP Morgan, 
and Morgan Stanley had concentrated on the pending sale of 
CCB, which he described as a "a landmark case" that would 
set the tone for future bank sales.  FSC Chairman Kong Jaw- 
sheng will organize another team to visit Europe in October 
2005 and promote sales of local financial institutions. 
 
4.  (SBU) According to Deputy Director Lee, the Taiwan 
government has resolved CCB labor union's opposition to 
privatization.  Lee said an agreement with labor has been 
reached, so the purchaser will be able to accurately assess 
the risks and costs of labor.  Lee noted that this labor 
protection agreement and other factors require that CCB sell 
at a significant discount from the open market price of the 
shares (currently at NT$19.6).  Another reason for a 
discount is CCB's relatively poor financial status. 
According to CCB's latest financial statement, its NPL ratio 
as of December 2004 was 7.97%, higher than the local average 
of 6.1%.  CCB's rates of return were 0.12% return on assets 
(ROA) and 2.3% return on equity (ROE), both lower than 
international standards of one percent ROA and 15-20 percent 
ROE. 
 
Second stage Financial Reform 
----------------------------- 
 
5.  (U) The sale of CCB is the second stage of Taiwan's 
financial reform program that began October 20, 2004.  One 
of the stated goals of the second stage is that foreign 
investors should acquire and manage at least one state-owned 
bank before the end of 2005.  Another related goal is 
consolidation of Taiwan financial institutions, specifically 
to reduce the number of state-owned banks by half to six, 
and the number of financial holding companies by half to 
seven.  Taiwan officials hope that through mergers and 
acquisitions the three largest Taiwan banks can each raise 
their market share above 10%.  During the first stage of 
financial reform, Taiwan lowered local banks' average NPL 
ratio (using the internationally accepted standard of 
principal or interest over three months overdue) from a high 
of 11.7% in March 2002 to 6.1% in December 2004. 
 
6.  (U) Taiwan President Chen Shui-bian told a group of 
foreign insurance company executives on March 22 that the 
second stage of financial reform will bring Taiwan's 
insurance practices in line with those of developed 
countries and make it easier for foreign insurance companies 
to operate in Taiwan. 
 
Will Low Bids Be Accepted? 
-------------------------- 
 
7.  (SBU) In what might be a sign of looming problems in the 
CCB sale, the Ministry of Finance responded to a Financial 
Times report that a discount of up to 50% from market price 
would be needed to make CCB attractive to foreign buyers by 
announcing on March 22 that it will not approve the sale if 
bids are far below the market price. 
PAAL